c om p u t e r l aw & s e c u r i t y r e v i ew 2 7 ( 2 0 1 1 ) 3 7 7e3 8 4

ava i lab le at www.sc ienced i rec t . com

www.compseconl ine .com/publ i ca t ions /prodc law.h tm

How virtual are virtual economies? An exploration into thelegal, social and economic nature of virtual world economies

Clare Chambers

Bristol Law School, UWE, UK

Keywords:

Virtual economy

Second life

Linden monetary policy

Ginko financial

Eve online

E-mail address: Clare.chambers@uwe.ac.0267-3649/$ e see front matter ª 2011 Dr Cldoi:10.1016/j.clsr.2011.05.007

a b s t r a c t

Virtual world economies are undoubtedly increasing in growth, participation and impor-

tance. Their macroeconomic impact has already been seen as important in the real world

economies; however its governance and jurisdiction is unclear. This paper will argue that

virtual economies are not actually as virtual as they first appear to be. Secondly the paper

argues that because of the real world effects and impacts virtual world economies can have,

they should be applicable to real world jurisdictions and regulations. The question that is

therefore posed is in which jurisdiction should the legal backbone be placed? The paper will

be divided into several parts. Firstly, a background of what virtual worlds are, and what they

mean in linguistic definition. Secondly, a review of law economics and history shall be

considered to determine that what is once considered ‘other worldly’ is accepted as the norm.

Thirdly, the paper will consider a virtual world economy, namely that of Second Life to

establish the real world impacts that virtual world economies can have. Fourthly, the paper

will consider two case studies of financial crisis occurring in the virtual worlds and the

synergies we can draw from the real world. Finally, the paper will conclude with the

proposition that legal governance is required and will enable what is already a lucrative

business to flourish further within the realms of possibility and not virtually.

ª 2011 Dr Clare Chambers. Published by Elsevier Ltd. All rights reserved.

1. Introduction This paper advocates this theory and will outline the rational

Within this paper the legal philosophy behind virtual econo-

mies will be discussed to determine whether virtual world

economies are virtual and therefore outside the remit of the

rule of law, orwhether they aremerely a continuumof the real

world economy. The aim of the paper is to enable the reader to

understand the concepts of virtual economics and the virtual

market placewithin virtualworlds. The paperwill advance the

position that virtual worlds are not as virtual as one may

initially think. Virtual worlds are affected by the real and the

real by the virtual, thus demonstrating the continuum of

existence that has occurred since human beings have evolved.

uk.are Chambers. Published

and thinking behind this proposition.

First and foremostwemust turn our attention to the virtual

world in which the economics we will later discuss occur. So

this point turns to what is a virtual world and whether

a virtual world, created by a computer software system can

ever be what its namesake suggests i.e. virtual. If the world is

truly virtual then economic activities or any other activity

need not be applicable to real world laws. However, if these

virtual worlds are not indeed ‘virtual’, then the problem of

legal culpability and jurisdiction arises. Therefore it is

important to establish what is a virtual world? Is a virtual

world really virtual? Andwhat activities take placewithin that

by Elsevier Ltd. All rights reserved.

c om p u t e r l aw & s e c u r i t y r e v i ew 2 7 ( 2 0 1 1 ) 3 7 7e3 8 4378

world that requires real world legal culpability and

jurisdiction?

Academics have tried to capture what a virtual world actu-

ally means. Knock describes virtual as being a world created

by humans. He says that: “Virtual worlds can be described

as technology-created environments that incorporate repre-

sentatives of real world elements such as human beings, land-

scapes and other objects”.1 In other words Knock is stating that

a virtual world is a simulation of the real world, with real world

elements within it, but that it is acted out via a computer

generated system. It is these real world elements that pose

problems for researchers when examining the virtual worlds.

Firstly if the virtual world is a simulation of the real world, it is

not ‘virtual’ in its truest sense. Secondly, if these real world

objects in thevirtualworld (or ‘inworld’ if youshall) areaffected

by events in the realworld then it is not ‘virtual’ either. Rather it

is more a continuum of the development of e-commerce and

the cyber world. It is more akin to a faux representation of the

real world and simulates the real world to be a utopia of what

real worlds could be. Therefore, it is not virtual but rather faux

virtual.SecondLife (SL) “isagoodexampleofavirtualworld that

attempts to replicate elements of the real world with practical

application inmind”2, and it is for this reason that SL economy

shall be considered later within this paper.

However, worlds such as SL are termed as being virtual and

this virtual status comes to be at its truest when considering the

implication of the actions taken within the virtual worlds. The

implications whether they are criminal, civil, social or economic

can be seen to have an effect on the real world. The problem

therefore comes when the implications, named above, do not

have real world consequences. For example, the situation

surrounding rape in a virtual world and whether it is a criminal

event in the real world is unclear.3 If such a serious crime in the

real world is ambiguous to say the least in the virtual then what

does the virtual world hold for more mundane but none less

important world of economics, banking andmonetary policy?

We now turn our attention to the economy of virtual

worlds and the economy of SL. Since its creation SL has been

underpinned by its closeness to the real world and the

economy is no different. Every economy in the real world is

influenced by policy makers and government alike, SL is no

different. In SL the virtual economy is affected by its devel-

opers for, as mentioned above, there is no government

controlling the virtual world. Spiress (2006) points out that one

of the most recent changes to the economy of SL is because of

the decision taken by the developers, Linden Labs. “Second

life’s economy has been surging since Linden Lab made the

unusual decision three years ago to grant users intellectual

property rights. Thousands of people have created homes and

1 Kock, N. ‘E-collaboration and E-commerce in Virtual Worlds:The potential of second life and world of war craft’, InternationalJournal of E-collaboration, Vol. 4, Issue. 3. 2008.p.1.

2 Ibid, p.3.3 Lynn. V. ‘Virtual rape is traumatic, but is it a crime?’ Wired. 5

April 2007. http://www.wired.com/culture/lifestyle/commentary/sexdrive/2007/05/sexdrive_0504 retrieved 29 April 2010; MacK-innon, ‘Virtual Rape’, Journal of Computer Mediated Communi-cations, October 2007 13 Vol 2 No.4.; Bugeja, M. ‘Avatar Rape’,Inside Higher Ed. 25 February 2010. http://www.insidehighered.com/views/2010/02/25/bugeja retrieved 29 April 2010.

business on virtual land leased from the site and are peddling

virtual items as varied as yachts and ice cream”.4 Spiress

therefore indicates to the turning point in SL economic

history, where Intellectual Property rights were granted to SL

residents and from this economic activities have thrived. We

can therefore determine that there is an economically active

world, taking place within second life and this is later

demonstrated by recent figures disseminated from SL itself

and its own stock exchange, but more of that to come later.

What must be considered here is the very nature of what

a virtual world is? We have established that within the world

called SL there is an economy and trade does take place. The

trade is facilitated through the in world currency Linden$’s.

The name itself derives from the real world word, dollars.

2. What is a virtual world?

A virtual world according to Castronova is a computer pro-

grammewith three defining features: Interactivity, physicality

and persistence. Before examining these three elements let us

turn to defining the word virtual and world, separately and in

turn.

Virtual, as an adjective, is defined as:

� virtual(a): being actually such in almost every respect; "a

practical failure"; "the once elegant temple lay in virtual

ruin"

� virtual (a): existing in essence or effect though not in actual

fact; "a virtual dependence on charity"; "a virtual revolu-

tion"; "virtual reality".5

Or as:

� Virtual (a) having the essence or effect but not the appear-

ance or form of.6

The word comes from the Medieval Latin term virtualis or

virtus meaning virtue.

Virtue is defined as:

� Virtue (a) the quality or practice of moral excellence or

righteousness;

� Virtue (b) the particular moral excellence;

� Virtue (c) any of the cardinal virtues; justice, temperate, and

fortitude

� Virtue (e) an affective active, or inherent power or force. 7

Virtue comes from Old French Vertu and Latin Vertus

meaning manliness and courage, (Vir man).8

4 Sipress, A. ‘Where real money meets virtual reality, the jury isstill out’, Washington Post, 26 December 2006. http://www.washingtonpost.com/wp-dyn/content/article/2006/12/25/AR2006122500635.html 29 January 2010.

5 www.wordnetweb.princeton.edu/perl/webwn retrieved 29April 2010.

6 Collins English Dictionary.7 Ibid.8 Ibid.

c om p u t e r l aw & s e c u r i t y r e v i ew 2 7 ( 2 0 1 1 ) 3 7 7e3 8 4 379

These definitions give us a clue as to why the name was

chosen for the virtual world. The first definition, virtual is the

being’ actually such in almost every respect’, goes along with

the line of thinking of the paper. The world created online is as

close to reality as possible. It simulates the real world and

demonstrates its desire to be as close as possible to the real

thingbut incorporatingeverydayaspects into thevirtualworld,

which is given no escape. It is more of a utopia than a virtual

reality. The seconddefinition; that virtual is ‘existing in essence

oreffect thoughnot inactual fact’ alsoagreeswith the"theonce

elegant temple lay invirtual ruin" .The thirddefinition still does

not pose a problem for this paper’s proposition regarding the

virtualworld.Virtual is, ‘having theessenceor effect butnot the

appearance or formof’. In a virtual world there is no formother

than pixels on the computer screen but it has the essence and

the effect of a real world.

From the definitions above we can determine that a virtual

world is one that exhibits all the characteristics of a real world

and the only difference being is that the virtual one has no

physical form to it. If this is the case, then is it hard to see why

there are no legal ramifications for actions in world.

Returning to Catronova’s idea of what a virtual world is

somewhat differs from the literal definition of what a virtual

world is. In so far as the author believes that these elements can

be taken and can demonstrate that the virtual world created is

not actually virtual, but a continuum of the real world, but

placed in a virtual platform. If this is so, and which is what the

paper argues, then the virtual should be subject to real world

laws. Economics is a perfect example of how virtual economics

is actuallyhighly influenced anddrivenby the economic factors

in the real world. This is because there is a single common

denominator of the two worlds. That being human beings. The

question is whether anything that is created, played and

thought about by Humans can ever be truly virtual? As

mentioned above Castronova examines three elements ofwhat

constitutes a virtual world. The first can be expanded to include

the idea that the game can be accessed remotely by a large

number of people, with “the command inputs of one person

affecting the command inputs of other people”. This inter-

activity can be further expanded to demonstrate the idea that

the ‘command inputs’ are given by real world people, and have

affects inworld and in the realworldonother input commands.

Therefore put simply, the realworld is affected by the actions in

world, outlining the idea that the virtual is not so virtual.

The second element of Castronova’s virtual world is

physicality, that being “people can access the programme

through an interface that simulates a first-person physical

environment on their computer screen; the environment is

generally ruled by natural laws of Earth”.9 By having this

synergy with the real world, these virtual worlds are taking on

the appearance of being a continuum of the real world and not

being as virtual as their name suggests.

The final and third element is that of persistence; this being

the idea that the computer remembers the closing play of that

person or people, whether anyone is using it or not. 10 Nothing

9 Castronova, E. ‘Virtual Worlds: A first hand account of marketand society on the cyberian frontier’, CESifo Working Papers, No.618, December 2001.10 Ibid.

alters unless the users of that virtual world make it happen,

thereby demonstrating that the ‘in world’ needs people to

make it a world. It needs the real world influences to ensure

that the ‘in world’ occurrences happen. In other words, the

virtual world cannot operate without real world influences.

Having examined the definitions of what a virtual world is

it can be logically deduced that a virtual world is all but real

barring its lack of physical form. Therefore if it has real world

affects and is all but real baring its physical form could it not

be right to say there needs to be a ‘Rule of Law’ operating

within the world.

The Rule of law is that, as Lord Bingham suggests, that all

persons and authorities within the state, whether public or

private, should be bound by and entitled to the benefit of laws

publicly and prospectively promulgated and publicly admin-

istered in the courts.11 In general therefore it means that no

one is above the law and that the state’s citizens are bound by

the rules and that if broken they shall be tried fairly by a fair

legal system. Lord Bingham further clarifies the Rule of Law

through eight further points. These being:

1. That law must be accessible and so far as possible intelli-

gible, clear and predictable;

2. That questions of legal right and liability should ordinarily

be resolved by application of the law and not the exercise of

discretion;

3. That the laws of the land should apply equally to all, save to

the extent that objective differences justify differentiation;

4. That means must be provided for resolving, without

prohibitive cost or inordinate delay, bona fide civil disputes

which the parties themselves are unable to resolve;

5. Thatministers and public officers at all levelsmust exercise

the powers conferred on them reasonably, in good faith, for

the purpose for which the powers were conferred and

without exceeding the limits of such powers;

6. That adjudicative procedures provided by the state should

be fair. The rule of law would seem to require no less;

7. That the existing principle of the rule of law requires

compliance by the state with its obligations in international

law, the law which, whether it is derived from treaty or

international custom and practice, governs the conduct of

nations;

8. That the existing principle of the rule of law requires

compliance by the state with its obligations in international

law, the law which whether deriving from treaty or inter-

national custom and practice governs the conduct of

nations.12

We can say for certain that none of these are being carried

out in any clarity of distinction within virtual worlds and it is

this which is holding back their economies and development.

It is only with the adoption of these rules within the virtual

worlds that commerce can begin to have a real positive effect

on the real world. What is required is for the rule of law of real

world countries be adopted for these virtual worlds. The legal

jurisdiction of virtual worlds is a discussion for another paper

11 Lord Bingham Text Transcript. Law Society for Hereford andWorcester Tuesday 15 April 2010.12 Ibid.

c om p u t e r l aw & s e c u r i t y r e v i ew 2 7 ( 2 0 1 1 ) 3 7 7e3 8 4380

but whether the jurisdiction is adopted from the location of

the server or whether there is a new international rule of law

drafted, agreed on and implemented, it is clear the legal

situations must be clarified.

2.1. Law, economics and history

Virtual economics is a tricky area to pin down. Many

academics 13 have considered the economic point of view

from a commodity, profit and loss standpoint. Few have

considered economics as the economy, i.e. the money, the

transactions, the value of goods, the crises emanating from

the economy, of a virtual world. This part of the paper gives

way to these ideas. It is not meant to be an examination of

economics and the calculations of the profits and net gains of

the virtual world. For now what is being considered is the

monetary policy of virtual worlds. In other words how can

a computer pixel be attributed a real world value and how can

this be controlled given that once withdrawn from the in

world, it has real world affects?

The reason why we turn to history once again is that

history informs us of how things inworld and in the real world

have come about. The idea is that we only have economics

and in turn currency because it has been accepted over time.

In society we have placed a value on various commodities and

we exchanged money to get the goods. 14 But the question is

how did we get to the idea that coins and paper have a value

and that these can be exchanged for goods and now even

more so that we consider a plastic card as themeans of paying

for goods, as this card holds our wealth, or means, to do so.

Let us travel back in time. Where did the idea of money

come from? The idea of money dates back to about 4000e5000

BC. Remember that the idea of a virtual currency can be traced

back to this early period; after all, what is virtual is, this paper

is arguing, but a continuum of the real. What was considered,

other worldly in 4000BC is now out of date for us and what is

virtual money now could be, and most likely will be, consid-

ered out of date in several thousands of years time.

The basic form of trade was called bartering, where you

swapsomethingofyours for somethingthatyouwant in return.

This is ok for a time but what happens when you want some-

thing and the person does not want to trade your goods for it?

This led to the idea of having a common commodity which

could be traded for goods, such as grain, rice, honey etc.It was

this common feature which can be seen in elements of virtual

money today. The common feature allows for a fixed and

standardmeasure for goods to be traded and purchased, it also

allows for thecommoncommodity tostorevalueandalsoactas

a medium of exchange.15 This is where the concept of money

was born; this method provided a common measure accepted

byall for exchanges of goods. It is important to labour this point

as trade “cannot happen if there is not an agreement amongst

13 Castronova, E. ‘Virtual Worlds: A first hand account of marketand society on the cyberian frontier’, CESifo Working Papers, No.618, December 2001.14 Coins to QQ at Web 2.0 19 February 2008. http://www.forbes.com/2010/01/04/virtual-economy-gaming-technology-breakthroughs-levchin.html retrieved 23 April 2010.15 Ibid.

everyone that a particular currency has value”.16 People of SL

accept that Linden$ are currency and that they have an agreed

value. They use these Linden$ as a means of bartering and

obtaining good that theywould not be able to obtain unless this

system of ‘money’ was in place.

In 3000 BC the idea of collective protection of currency

began. The ideawas to collect together the currency and share

the cost for an army to protect their currency and therefore

loss. Along the banks of the Nile, granaries for grain appeared

which kept the grain for local people. This is where the name

bank comes from, i.e. the storage of currency was first along

the river banks. The first accountants began logging what

came into the collective store and what was removed. Having

grain as amode of currency was fine until there was a draught

and grain was in sparse supply and this happened to the

ancient Egyptians around 2200 BC. This was the first banking

crisis in the world.

As the grain became scarcer, it also becomes more valu-

able. After 200e300 years of problems associated with the lack

of grain, metal became the chosen common commodity for

currency. “This is important because it finally moves currency

to something that is more abstract”.17

However practically speaking, moving large amounts of

metal around to conduct transactions posed various physical

problems and so countries such as Sweden and China con-

verted the metal currency to paper money. These sums of

currency were held in banks. By converting the currency to

paper frommetal and in turn from grain, adds another layer to

our currency continuum, from the real to the abstract.

What happened next, and yes forgive me that the leap is

rather a large one, but the next step is rather an interesting

turn of events for bankers and currency globally. This was the

creation of the reserve or central bank in any one country. It

was created by John Law (1671e1729), who at the age of 29 shot

a man in a duel for the hand of a lady and was tried and

convicted ofmurder. He was sent to jail and escaped to France

soon after. Law was an early economist and observed that it

would be better for nations to control the flow of currency and

to do this he observed, it would be prudent to issuemore IOU’s

than the banks hadmetal for should the need arise tomake an

issue to the depositors. Law came up with the idea that if the

nation had a reserve bank which guaranteed the money, each

individual bank could lend more than it had in its reserves.

However, this could not happen unless there was support

from the government as the central bank could only be

controlled by the law of the land and therefore the govern-

ment. Lawmanaged to convince the government to undertake

this task and created what is known today as ‘fractional

reserve banking’, whereby the banks only hold a fraction of its

obligation in any one time. This notion is ok, whilst the people

of the nation trusts its government and therefore banks. If

a society loses its trust and confidence in the government and

or the banks, then bank runs can occur, i.e. where everyone

decides to take their money out of the bank at one time, and

thus the bank, only holding a fraction of its obligation, fails to

provide each person with their money.

16 Ibid.17 Ibid.

c om p u t e r l aw & s e c u r i t y r e v i ew 2 7 ( 2 0 1 1 ) 3 7 7e3 8 4 381

The modern day (from the 1920’s) history of the reserve

bank and the international and national collaboration is

a story for another time, for nowwhat we can see is three fold.

Firstly for currency to be in place, it must be a common

accepted medium. Secondly currency has moved from the

real to the abstract in the real world and therefore the creation

of virtual money is no less real than the creation of paper as

ameans of representingmetal coins, it is just rather new to us

all. Finally, and most importantly, is that someone must be in

control of the flow of money into and out of the banks and the

nation. This is not the case for the virtual banks at the

moment and it is this which is causing the problems in world

currently. As Spiress points out: “Courts are trying to figure

out how to apply laws from real life, which we’ve grown

accustomed to, to the newworld. The Law is struggling to keep

up”.18 Whether it is the criminal law or civil law, the legal

position of virtual worlds, is ambiguous and unclear. There is

no dispute that the virtual word contains elements such as

politics, crime and economics but the law which governs and

controls is unclear.

3. Virtual economics and markets

Within virtual worlds, (and not just SL), there are thriving

economies, with their own markets and currency (World of

Warcraft is yet another example). At the present time most of

these virtual worlds and currencies are separate. They are

bifurcated only by the lack of open standards, whereby virtual

money, avatars and commerce can be exchanged between

worlds. An open standard would allow for free movement of

goods and trade between these virtual worlds and would pave

theway for a definiteneed for ahigher jurisdictional basis. Ifwe

assume that the regulatory position at the moment within

virtual worlds is that rules are issued by the game developers,

and not by a court of a real world, then we can assume that

when open standards arrive in virtual worlds there will be

a need for one governing body. The technology is present in

theseworlds to facilitate open standards.What is lacking is the

clear legal position. Therefore, although the economies are

thriving in each individual world, they are also stuck within

those worlds. If we embrace the idea of having e-commerce

developedviavirtualworldeconomies thenthe legalpositionof

the economyneeds to be established. This part of thepaperwill

examine SL economy and will explore the virtual economics

phenomenon and the challenges it faces.

In SL, the economy really started to thrive once a legal

position of ownership rights was clarified. Thus, it gave

credence to the argument that once there is a clear legal

position within the virtual world, it allows users more

freedom and security to fully immerse themselves within the

game.19 Furthermore, it is important for the economic posi-

tion to also be clear within these worlds. As Castronova indi-

cates, “economists believe that it is the practical actions of

18 Sipress, A. ‘Where real money meets virtual reality, the jury isstill out’, Washington Post, 26 December 2006. http://www.washingtonpost.com/wp-dyn/content/article/2006/12/25/AR2006122500635.html 29 January 2010.19 Ibid.

people, and no abstract arguments, [are those] that determine

the social value of things”, 20 and affect the economy. Catro-

nova believes that, “virtual worlds may also be the future of

e-commerce”.21 It is therefore important for legal and

economic scholars alike to understand the already complex

and multi-layered economy of virtual worlds.

3.1. The economy in second life: Linden monetary policy

“When it comes to money SL and your first life are very

similar. 22 As previously mentioned SL resembles in most

ways the real world. If you want a new pair of shoes then, in

the real world, you need to have money to buy those shoes. It

is the same in SL. The currency in SL is called Linden dollars or

L$ as an abbreviation. This currency only has value in that

world but it can be exchanged on an exchange to real world

currency. This is very unusual in virtual worlds but it is

beginning to be the trend for the future. This is because, aswill

be considered later on, e-commerce has been very successful

in the real world. The ‘in world’ exchange is called the LindeX.

Therefore, you can say that SL has money in the world. You

can use the ‘in world’ money to make more in world money

and then cash it out and pay for real world goods with it.

LindeX is run andmonitored by Linden Labs, and although it is

not a government or financial services organisation, it deals

with the exchange of money flowing through SL. This poses

further queries for governance. In a sense, this is an unregu-

latedmonetary exchange. There is no recourse, nor rule of law

governing the exchange of money.

So the question that needs to be asked at this stage is how

you get real money into the virtual world. This is relatively

easy; all you need is either a credit card or a PayPal account.

You just select the amount you want to transfer and like

a normal transaction, you can purchase the Linden $. This is

done through the LindeX, as in the real world on the stock

market. Youwill then on your account (top right of the screen)

have an amount of Linden $ that you can then spend or invest

as you wish. Linden Labs will charge any user an amount to

carry out the transaction to transfer Linden $ to real world

currency. Therefore to cash out of the ‘in world’ monetary

system will cost you money and will make Linden Labs more

money. However, the price of the transaction is all market

dependent. It is about supply and demand, if someone sells

a large amount of Lindens for a low price, the price of Lindens

goes down. You have three options when you are cashing out

your money. You can have it paid into a PayPal account, have

a domestic cheque if you are in the USA or have an interna-

tional cheque if you are outside the USA. These methods may

take a few days for the money to be transferred. It is not as

a quick process to get your money out as it is to put your

money in. This method of cashing out poses problems for

money laundering and what this paper will later go on and

discuss, but if you have the money paid out as a cheque,

20 Castronova, E. ‘Virtual Worlds: A first hand account of marketand society on the cyberian frontier’, CESifo Working Papers, No.618, December 2001.21 Ibid.22 Robbins, S. & Bell, M. ‘Second Life for Dummies’, 2007, WileyPublishing. P.15.

c om p u t e r l aw & s e c u r i t y r e v i ew 2 7 ( 2 0 1 1 ) 3 7 7e3 8 4382

domestic or international, or through a PayPal account the

anti-money laundering checks for these methods do not

allows for checks on money laundering.

Another way of purchasing Linden $ is via in world trans-

actions. During your time ‘in world’ you can press the

‘Purchase Linden $’ button and purchase the amount you

require whilst in world. Your account details you provided

when setting up an account and will debit your credit card or

PayPal account for the required money.

SL economy is known for its free market agenda,

however controls are placed on how many Linden $ you can

trade in any given transaction. The control and the limits is

meant to protect Linden $ from fraud, although whether this

is completely successful is nebulous, but more of that to

come.

The economy in SL has not been far from contention since

its conception and continuous growth. In January 2008,

Linden Labs implemented a not so free market banking policy

after the financial crisis of Ginko Financial collapsing. Linden

Labs issued a ‘New policy’ dictum which indicated their

increasing increment into the governance of laws and poli-

cies over the virtual world. The new policy indicates that no

one other than a regulated bank in the real world can now

operate a bank within a virtual world. 23 The policy states;

“we are implementing this policy after reviewing resident

complaints, banking activities and the law, and we’re doing it

to protect our residents and the integrity of our

economy”.(11) Linden Labs stated the risk these unregulated

banks posed to the SL economy succinctly. They stated,

“These banks have bought unique and substantial risks to SL,

and we feel it’s our duty to step in. Usually we don’t step in

the middle of resident-to-resident conduct”. 24 This high-

lights the importance of clarifying the legal and regulatory

situation surrounding not only the economy but the rest of

the in world society. Linden Labs acknowledges this by

stating; “As these activities grow, they become more likely to

lead to destabilisation of the virtual economy. At least as

important, the legal and regulatory framework of these non-

chartered, unregistered banks is unclear.25 However, they are

not prepared and nor should they be, to become a bank or

lender of last resort. They are’ after all, nothing more than

a successful games developer. They are not a bank but their

role, in world, in ambiguous and unclear at best. They play at

creating the law, being the governance of the world and being

the financial regulator, but in actuality they do none of these

things when it is required of them. What they do is issue

guidance and in world rules none of which have governance

in the real world. The rule for this is that; “Under its new

banking rules, SL says only charted banks will be allowed,

though it isn’t clear any real banks will operate in the virtual

play world”.26 However, whether in world rules can ever

23 Linden Labs. ‘New Policy Regarding In-World Banks’, 8 January2008. http://blogs.secondlife.com/community/features/blog/2008/01/01/new-policy-regarding-in-world-banks.htm Retrieved 15March 2010.24 Ibid.25 Ibid.26 Sidel, R. ‘Cheer up Ben: Your Economy isn’t as bad as this one’,The Wall Street Journal, 23 January 2008. http://online.wsj.com/article/SB120104351064608025.html retrieved 15 March 2010.

amount to a strong and robust economic and financial

framework which is needed to control the amount of money

flowing in and out of the world is contentious. Readers and

commentators must not forget that SL is a virtual world and

ultimately a game. But a game which has real world affects.

The lines drawn between the two are unclear and blurred. It

is no wonder that regulators and governments alike are

baffled by how to regulate and control this medium of

monetary exchange. Yet it is clear that some degree of

control and structure will need to be put into place quickly

given the growth of SL’s economy. As Linden Labs outlines

and admits: “The whole SL adventure encourages user

freedom, but it has so many users, and so much money is

flowing in, that you have to face that the community needs

some degree of control”.27

3.2. Synergies with real economies and themacroeconomic impacts of virtual economies

“If virtual worlds do, in fact grow, as a human phenom-

enon, there may be some implication for Earth econo-

mies”.28 Castronova denotes this point succinctly and for

the most part he is correct. Virtual worlds do actively affect

the real world economies merely because they are part of

the continuum of what occurs in the real world. Hence the

virtual is not so virtual. What is causing nebulosity is the

lack of governance over these macroeconomic impacts of

virtual economies. Castronva continues with this assertion

and says; “If economic activities migrates into virtual

economies, where there are no earth jurisdictions, there

will be a net loss of taxable assets and incomes in Earth’s

economies”.29 Again, he is right. Without a clear and

defined legal structure the economies of the virtual worlds

could spiral out of control and the benefits which they

could offer to the real economy might be lost. This next

section examines two instances where financial scandal

has hit virtual economies with a minimal legal response.

However, the impact of such virtual financial scandals is

only too real for those who lose money in the virtual

worlds.

3.2.1. Virtual bank runs and troubles: case studies GinkoFinancial & EveOnline“So now, Linden Lab has deemed that only banks in the real

world can open a bank in SL. And so, folks who deposited

money in the virtual banks want their money back, and some

have closed”.30 The reason for this is due to the financial crisis

that has occurred within virtual worlds. Virtual economies,

like real world economies have suffered the fate of financial

scandal and crisis. Two of themost recent andwell known are

charted here for the record.

27 Semuels, A. ‘Virtual Bank’s Second Life Scheme Raises RealConcerns’, 22 January 2008. http://articles.latimes.com/2008/jan/22/business/fi-secondlife22 Retrieved 26 April 2010.28 Catronova, E. ‘On Virtual Economies’, CESifo Working Papers,No. 752. July 2002.29 Ibid.30 Edu Games Blog. ‘A Run on Virtual Banks in SL’, 23 January2008. http://edugamesblog.worldpress.com/2008/01/23/a-run-on-virtual-banks-in-sl/ retrieved 29 January 2010.

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3.2.2. Ginko FinancialGinko financial was a large investment bank within Second

Life. It has been described as “unregulated, unaudited, and

a magnet for controversy”.31 However in its day Ginko

Financial was a very popular and successful business. It

offered investors large returns on their money in return for

investing their money in the virtual bank. Linden Labs made

policy changes to gambling and financial matters ‘in world’

which subsequently made investors want to withdraw their

money. Ginko financial could not deal with this demand on

investments and there was a run on the bank. This even-

tually led to many investors losing their money. It has since

been discovered that the investment bank was actually

a Ponzi scheme whereby new investor’s money is used to

pay old investors thus leaving no money for the new

investor’s to reclaim. Linden Labs, as a result of this, made

any bank which was not regulated or chartered in the real

world illegal in SL.

As Sidel states: “The banking crisis at SL surfaced during the

summer when Linden banned gambling on the site, citing

conflicting regulations around the world. That caused a run on

Ginko Financial that had invested heavily in the virtual world’s

gamblingoperations.Ginkocappedwithdrawalsandultimately

issues bonds to customers instead. The bank went out of busi-

ness in August”.32 He continues and denotes: “The collapse led

to an outcry from depositors at SL banks”. (12) Linden Labs

respondedbyallowingonlycharteredbanks tohavebankstatus

in the virtual world. However Linden Labs insists it cannot and

will not act as a banking regulator. “If this is realmoney, there is

an argument you need to follow real law”.33

However, Duranske point out that "A lot of people forget

that Second Life is governed by U.S. law and the laws of Cal-

ifornia, it just so happens that these laws haven’t been

enforced." 34 This lack of enforcement and even the confusion

that there could be a legal safety net for investors causes

many problems for the virtual world economy e.g. inhibiting

growth and furthers the argument that the virtual world is not

so virtual and should be regulated via real world laws.

An advocate for not incorporating real world laws is

Bloomfield who says: "I am really hoping that RL (real life)

regulation does not come to SL because right now SL has the

chance to sort out what type of oversight and regulation it

wants." He further opines that: "If the RL authorities or Linden

Lab do start meddling with business affairs, it could ruin

a golden opportunity for real innovation and creativity,

a chance to recreate a world in a new image."35

GinkoFinancial scandalundoubtedlychangedthe faceof ‘in

world’ banks and financial institutions and just as in the real

world it is scandal which pushes through policy changes and

31 Reuters. A. ‘Ginko Financial- pyramid or pioneer’. 15 October2006. http://secondlife.reuters.com/stories/2006/10/15/ginko-financial-pioneer-or-pyramid/ retrieved 7 May 2010.32 Sidel, R. ‘Cheer up Ben: Your Economy isn’t as bad as this one’,The Wall Street Journal, 23 January 2008. http://online.wsj.com/article/SB120104351064608025.html retrieved 15 March 2010.33 Ibid.34 Gardiner, B. Bank Failure in Second Life leads to calls forregulation. Wired. 15 July 2007. http://www.wired.com/gaming/virtualworlds/news/2007/08/virtual_bank retrieved 7 May 2010.35 Ibid.

regulatory reform. In this case it is Linden Labs who alters

policy allowingonly realworld banks andfinancial institutions

to act as such in the virtual world but it did not again, produce

clarity on the legal jurisdictional issues which SL so needed.

3.2.3. Eve OnlineA games developer and one of Iceland’s top companies set up

a virtual world called Eve Online. What has happened in Eve

Online during 2009-10 demonstrates the similarities with real

world banks. Eve Online was very successful: in 2009 it had

300,000 people paying $15 a month to use the platform for

interacting on the site. The virtual world has a free ‘anything

goes’ market and allows users to buy goods and support their

role within the world. “Eve has 66 market places for some 5000

items with more than one million transactions per day”.36 Eve

createda virtual bank, Ebank. The currency is called interstellar

credits (ISK) and is traded for goodswithin theworld. However,

when some players did not have enough ISK’s to purchase

goods, an entrepreneur in Eve created a bank thatwould accept

depositions and lend to players who would pledge their world

assets as collateral.37 Given human nature and banking inter-

action, the bankwas a success and accumulated 8.9 trillion ISK

in deposits and 13,000 accounts belonging to 6000 users. 38 The

top executive of the Ebank then made off with the deposits of

the bank and sold them for real cash to gamers on the black

market exchange onEve.Hehas since beenkicked off the game

and the bankhas shut down. The bank, alongwith its boardhas

been trying to sort out the crisis that ensued. Depositors with-

drew 5.5 trillion ISK from the bank.

Reports are unclear as to the amount that the executive

embezzled but there are discussions that 10% of the overall

bank deposits were taken by him.What is important though is

that there is no final regulator or no lender of last resort which

would offer a safeguard for depositors.

Thiswas reportedgloballyandnewsagencies called this the

start of the “Virtual version of the credit crunch”. 39 In fact it is

supposed that the executive stole the money to pay medical

bills and to put down a deposit on a house, both of which are

consequences of real world affects. The executive has been

thrown out of the game due to the terms and conditions of Eve

online and steps were taken to recapture some of the money.

Within all this the issue of law and jurisdiction arises, as there

is none, or at best the legal situation is unclear.

It has been noted that “the laissez-faire approach to both

business and the law has allowed EVE players to enact spec-

tacular scams, with other players paying the price. One player

opened a bank and then walked off with about 700 billion in

the game’s ISK currency, or close to $120,000 in U.S. dollars if

sold illegally to other players on eBay.40

36 Cox, R. ‘A Virtual Bank With Real Woes’, The New York Times,15 June 2009. http://www.nytimes.com/2009/06/15/business/15views.html Retrieved 29 January 2010.37 Ibid.38 Ibid.39 BBC News. ‘Billions Stolen in online robbery’, 3 July 2009.http://news.bbc.co.uk/2/hi/technology/8132547.stm Retrieved 26April 2010.40 Hse, J. ‘Second Life Bank ‘Crash foretold financial crisis’.MSNBC http://www.msnbc.msn.com/id/27846252/ accessed 7May 2010.

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When real world items are affected by ‘in world’ actions,

users call on real world enforcement agencies to govern the

world. There is, therefore confusion overwhether it is a virtual

world where the rules are governed by the developers of the

game or whether because real world aspects are being

affected, real world repercussions should occur. Cox illus-

trates this succinctly, “as in the real economy, the customers

[are] tempted to appeal to a higher authority”.41 What is

unclear is what is this higher authority, the developers or the

Rule of law?

4. Summary

Within this paper we have explored the complex world of

virtual economics and in particular the economy of one world,

Second Life. It has been demonstrated that the nuances

between the real and the virtual are indefinable except for one,

rather important facet: that being the legal position of the

virtual world and its citizens.

41 Cox, R. ‘A Virtual Bank With Real Woes’, The New York Times,15 June 2009. http://www.nytimes.com/2009/06/15/business/15views.html Retrieved 29 January 2010. 14.

There are two schools of thought in this debate: one being

that the virtual and the real are distinct, bifurcated by the

realms of reality. The second, and the one which is advocated

within this paper, is that the two are merely a continuum of

each other and that over time, what is considered unreal will

soon be considered the norm and the real. What is clear from

all of this discussion is that the legal situation is vastly

ambiguous and at best unclear. There is a lack of clear

governance, jurisdiction and rule of law. Within this lack of

governance and control there is a lack of real world regulation

such as price control, taxable assets and income control which

would have a benefit for the real world and causes disadvan-

tages to the virtual world. What must be considered is the

legal position of the virtual world. For the virtual is not as

virtual as its name suggests and is considered here as

a continuum of the real world and thus must be subject to the

Rule of Law.

Dr Clare Chambers (Clare.chambers@uwe.ac.uk) Senior Law

Lecturer, Bristol Law School, UWE.